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Sweet music for Apple
The iPod was a huge hit during the holidays. Will its new mini model help lift the stock?
January 7, 2004: 3:41 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - The Cooper Mini is all the rage in the automotive world. Apple Computer is hoping that the iPod mini has a similar effect in consumer electronics.

Apple unveiled a smaller version of its popular digital music device at the MacWorld conference Tuesday. The iPod mini, which comes in a variety of colors, holds about 1,000 songs and costs $50 less than what previously had been the cheapest version of the iPod.

“ Apple is kind of the BMW of PCs and consumer electronics. ”
Susan Byrne
Westwood Management

And if the iPod mini is as successful as its larger brother, that could give a maxi boost to Apple's stock price.

Even though there are several new digital music players on the market -- Dell introduced one for the holidays and Samsung has a device co-branded with the now legal music store Napster -- and scores of music sites to compete with iTunes, Apple remains the king of the online music world. Among the new competitors offering music sites are Wal-Mart and RealNetworks.

Some tech watchers were expecting Apple to come out with an even cheaper version of the iPod than the mini, which costs $249.

But Susan Byrne, chief investment officer of Westwood Management, which owns Apple shares, said consumers will continue to pay a premium for Apple branded products. "Apple is kind of the BMW of PCs and consumer electronics," she said.

Quarter could be huge

At MacWorld, Apple CEO Steve Jobs raved about how well the iPod and iTunes were doing, saying that the company sold 730,000 iPods in the crucial holiday shopping season. That's more than a third of the total number of iPods sold since the product debuted in 2001. He added that more than 30 million songs, at nearly a buck a pop, have been purchased since iTunes debuted in April.

Still, despite the buzz surrounding Apple's success in the music world, analysts' earnings estimates for its fiscal first quarter, which ended in December, have been unchanged for the past two months.

Wall Street's consensus projection is 14 cents a share, compared with a profit of 3 cents a share a year earlier. Analysts are predicting that sales rose 29 percent to $1.9 billion. Apple is due to report its latest results on Jan. 14.

But Matt Kelmon, president of Kelmoore Investment Co., thinks Apple will report a "blowout quarter" thanks to strong iPod and online music sales. For this reason, he said, he recently doubled his position in the Kelmoore Strategy Eagle fund to 350,000 shares.

"I haven't felt this good about a stock in awhile," he said.

For Wall Street, much of the focus has been on Apple's market share in the personal computer market, which pales in comparison to Hewlett-Packard and Dell, the makers of PCs that run on the Windows operating system.

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Still, music is becoming an increasingly important part of the Apple investment story. Sales of the iPod more than doubled in fiscal 2003 and accounted for nearly 6 percent of Apple's total revenue.

Byrne said she thinks gross profit margins for the iPod could be north of 30 percent, which would be higher than the company's overall gross margins.

And the success of the iPod could help drive sales of Apple's Mac line of computers, said Vinnie Muscolino, a managing director with mutual fund firm David L. Babson, which owns Apple in its DLB Value fund.

Shares look ripe for more gains

In addition, Muscolino thinks that as the overall economy improves, creative professionals who typically prefer Macs to PCs will start spending more on computers again, and that will benefit Apple.

Apple's stock reflects some, but not all, of this optimism.

The stock had a great year in 2003, running up nearly 50 percent. And the shares trade at a rich price-to-earnings multiple of 59 times fiscal 2004 earnings estimates.

But Kelmoore Investment's Kelmon said the stock looks more reasonable when you examine its price-to-book value ratio. Book value measures a company's assets minus its liabilities, in other words, what a company would be worth if it was liquidated.

Apple Computer Incorporated
Online music

Apple trades at 1.9 times book value while the S&P 500 trades at 3.2 times. "Apple's price-to-earnings multiple is always outrageous, but the price-to-book ratio is not outrageous," Kelmon said.

And Muscolino notes that if you look at Apple's balance sheet and stock price compared to its sales, the stock looks like more of a value.

When you factor out Apple's $4.6 billion in cash, investors are valuing the core (pardon the pun) business at just $3.5 billion. That works out to about 0.5 times estimated fiscal 2004 sales.

If you do a similar calculation for HP and Dell, their operating businesses, defined here as market value minus cash, trade at 0.7 and 1.8 times sales, respectively.

"Apple is an under-appreciated stock," Muscolino said.  Top of page

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